Trade worries push China's yuan below key level

China's yuan fell against the dollar on Thursday following the central bank's weakest daily fixing in nearly a year and after Washington's fresh tariff threats knocked the currency lower, although stocks regained heavy losses from the previous session.

The onshore yuan was changing hands at 6.6947 against the US dollar in late Asian trading. On Thursday morning, it crossed the key 6.7 to the dollar level to touch 6.7051.

Reversing Tuesday's slide, the Shanghai Composite index extended gains from the morning session, rising 2.1 per cent in afternoon trade. It lost 1.8 per cent on Wednesday. The blue-chip CSI300 index was also up 2.1 per cent following a 1.7 per cent drop the day before. Shares in Hong Kong were 0.9 per cent higher.

The fall in the yuan and stocks in recent weeks come as Sino-US trade relations deteriorated. On Wednesday, Beijing accused Washington of bullying and warned it would hit back after the Trump administration raised the stakes in their trade dispute, threatening 10 per cent tariffs on $US200 billion ($270 billion) of Chinese goods.

"The dominating selling pressure is exhausting now, and we believe the stock market is bottoming out thanks to historically low valuations and 'a warm breeze' from policymakers," including cuts to banks reserve requirements, said Zhang Quan, an analyst with Huaan Securities.

Related Quotes

However, the rally in stocks was mostly technical in nature after the heavy selloff, while sentiment remains depressed, Zhang added.

In the currency market, the People's Bank of China (PBOC) set its official daily fixing at 6.6726 per dollar, its weakest level since August 18, 2017 and the biggest one-day per centage weakening of the midpoint rate since January 9, 2017.

Traders said the supply and demand for the greenback were balanced at around the 6.7 per dollar level and that investors were holding off testing lows in the yuan for now.

"A weaker yuan could offset some of the negative impact from trade war. As long as the pace of depreciation of the yuan is under control, the spot yuan rate could fall further," said a trader at a Chinese bank in Shanghai.

He added that authorities are concerned that the yuan might fall too rapidly over a too short period of time.

Several traders said the official yuan fixing on Thursday was set firmer than market forecasts, a sign they interpreted as an official attempt to prevent the yuan from sinking too fast.

Qi Gao, Asia FX strategist at Scotiabank in Singapore, said the fixing was about 100 pips stronger than the market had expected, suggesting that the PBOC may have incorporated its previously suspended "counter-cyclical factor" in its midpoint calculation.

"It shows the central bank intends to stabilise the market and calm investors," said Gao, adding that "one-way speculation on the yuan's depreciation is not in Chinese authorities' interests."